Super funds face new YFYS investment challenges
Australia’s AU$3+ trillion superannuation system is facing its biggest challenge in decades.
New investment performance benchmarks threaten to overturn many successful portfolios that have bolstered members’ retirement lifestyles.
Those funds that fail to formulate a strategy to tackle the YFYS regulation risk being forced out of the industry. More than a dozen funds have already merged since the regulations kicked off in 2021.
J.P. Morgan Asset Management commissioned NMG Consulting Limited to survey super funds and their advisers to find out how the YFYS performance test is changing investment strategies.
While the regulation has quickly forced out underperformers, it is also changing the way all funds invest, including:
prompting a shift to low-cost, passive investing and a lower appetite for potentially differentiating and higher-returning investment strategies; and
a resulting lower long-term investment return for super members.
Super funds face new YFYS investment challenge
The research reveals new strategies and super fund concerns that will shape the future of retirement. It shows how funds are finding new ways to outperform as competition continues to ramp up across the industry.
This covers a variety of super fund specific strategies, including different ways to manage tracking error in public markets, as well as an increased focus on managing downside risks. Meanwhile, some funds will have a higher preference for taking risk in alternatives and unlisted assets over public assets and a lower propensity to take tactical positions.
J.P. Morgan Asset Management has also produced two white papers that explore new institutional approaches to building bond portfolios and to extract more from a traditional approach to passive equities.
The new bond portfolio: why YFYS is a game changer
YFYS’ new broad-based benchmarks no longer capture the performance of fixed income sub-asset classes. It will prompt some super funds to move their fixed income portfolios towards core fixed income strategies managed against the Bloomberg Global Aggregate Index, while some funds will likely favour more actively managed core solutions.
Building an equities portfolio within the new challenges of YFYS
New performance benchmarks are likely to prompt some super funds towards passive investing rather than risk underperforming with active strategies. However, an index approach is unlikely to deliver the outperformance needed in a challenging investment environment. Is there a way to combine the best of both worlds?
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